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U.K. Government Urged to Review Implementation of Loan Charge

Posted on Oct. 12, 2021

A new review of the loan charge should be conducted to “critically assess the implementation and effectiveness” of the Morse review recommendations and address the continued use of disguised remuneration schemes, U.K. tax professionals said.

Changes recommended by Amyas Morse in December 2019 “have not achieved their potential” to help people affected by the loan charge because “the bar has been set too high” in terms of what counts as reasonable disclosure to HM Revenue & Customs, the Chartered Institute of Taxation’s Low Incomes Tax Reform Group (LITRG) said in a budget representation published on October 6.

LITRG also endorsed a separate budget representation, published by the CIOT on October 4, calling for legislation to “prevent the assignment or enforcement” of loans that originated in a disguised remuneration scheme.

HMRC declined to comment on the submissions. Chancellor of the Exchequer Rishi Sunak will present his autumn budget on October 27.

“It is very likely” that some people within the scope of the loan charge still do not recognize themselves as being affected, and in some circumstances interest and penalties for late payment and filing could have “a totally disproportionate impact,” the LITRG said.

HMRC is “unable to segment loan charge cases into different groups based on underlying motivations” and tailor its approach accordingly, while some individuals have been unable to take advantage of the Morse recommendations, according to LITRG.

The group has asked Sunak to “consider pausing activity” around the loan charge and review the present situation. The review should explore “how best to move forward” and resolve outstanding cases, it said.

LITRG noted that a diverse population of workers affected by the loan charge includes those who sought to avoid paying tax and those — including lower-paid agency nurses, teachers, and construction workers — who were “unknowingly put into a loan scheme” by an agency or umbrella company seeking to gain an advantage in the labor market.

“The fact there are still such people being paid via disguised remuneration schemes, often by umbrella companies which are not even attempting to hide what they are doing, indicates that HMRC’s stance (which has driven their approach throughout the loan charge) that ‘individuals are responsible for their own tax affairs,’ is an oversimplification,” LITRG said.

A pause in HMRC activity followed by “a fresh look at the loan charge” would give HMRC the opportunity to “seek a deeper understanding” of the different populations involved and demonstrate that it is listening to the concerns expressed by members of Parliament, LITRG suggested.

Assignment and Enforcement of ‘Loans’

Many people affected by the loan charge have been contacted over the last 12 to 18 months by organizations claiming to “own or control their loans,” John Cullinane, CIOT's director of public policy, said.

“This is happening even though tax legislation regards the loans as taxable income, being pay for work done (i.e., not genuine loans), and the individual has often become subject to the loan charge, or has come to a settlement agreement with HMRC on the outstanding tax,” Cullinane noted. “Those individuals affected are in the unenviable position of having a third party seeking to enforce repayment of sums, which have usually been spent without anticipation of repayment as they were always intended to stand in for remuneration, as the government recognized (so far as protecting the public revenue is concerned) in introducing the loan charge.”

Cullinane argued that “the time has come to recognize this by protecting employees now being pursued for repayment of their pay for work performed, especially as many are vulnerable individuals on low income with no tax avoidance motive.”

People asked to repay a disguised remuneration loan should seek independent legal advice and examine their paperwork to “to confirm if there is a legal liability” to repay the loan, according to an HMRC guidance note updated on July 28.

“We are very concerned to hear about these activities to ask for repayment of loans and understand this may be distressing for those affected,” HMRC said. But it stated that any dispute “should be resolved through the courts in the normal way without government interference.”

Cullinane pointed out that finding appropriate legal advice — in a situation that “cuts across several different areas of law” — and paying for it is “beyond the means of many of those affected.”

“Many of the individuals involved in [disguised remuneration] schemes and subject to the loan charge were on low incomes, unaware of the abusive nature of the arrangements, or in such a weak labor market position that they cannot be regarded as on a par with aggressive tax avoiders,” Cullinane said. “We would therefore urge the government to make an early announcement of its intention to make these activities uneconomic, in an attempt to prevent, so far as possible, the abusive enforcement of these loans, particularly where vulnerable individuals, with no understanding of [disguised remuneration] schemes, are being asked repay pay for work done that has already been taxed.”

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